A five-year-long link between crude oil and gold has come apart as the economic recovery boosts energy consumption and lowers the metal’s appeal as a haven, encouraging investors to buy oil and sell gold.
The 120-day correlation between West Texas Intermediate crude and gold futures slipped into negative territory this year for the first time since July 2009, according to data compiled by Bloomberg. The relationship tightened, though remained negative, last week as military tension in Iraq boosted prices for both commodities.
Crude and gold moved in tandem for a half decade as investors sought to diversify into commodities from equities and bonds. U.S. economic growth is boosting expectations that fuel demand will rise, while gold is losing its allure as an alternative to the dollar, with the Federal Reserve signaling tighter monetary policy. Gold will be the worst-performing commodity in the next 12 months, forecast 71 percent of investors polled by Credit Suisse in May, while 49 percent said crude has the best outlook.
“The long-term chart for oil tells me that the price wants to go higher,” Michael Shaoul, who oversees more than $20 billion as chief executive officer at Marketfield Asset Management LLC in New York, said by phone yesterday. “Gold had a modest bounce this month, which I think has run its course.”
WTI crude slid 0.4 percent today to $105.97 a barrel on the New York Mercantile Exchange. The grade is up 4.3 percent this quarter. Brent, the European benchmark, climbed 0.7 percent to $114.26 on the London-based ICE Futures Europe exchange, for a 6 percent gain in the quarter. Gold futures for August delivery ended 0.1 percent higher at $1,272.70 an ounce on the Comex in New York, down 0.9 percent this quarter.
U.S. gross domestic product will increase 2.2 percent this year and 3 percent in 2015, following a 1.9 percent gain in 2013, according to economists surveyed by Bloomberg. The economy plunged into the worst recession in the post-World War II era in 2009.
The Fed trimmed bond-buying by $10 billion today for a fifth straight meeting to $35 billion, keeping it on pace to end the program late this year. Growth is bouncing back and the job market is improving, the bank said at the end of two-day meeting.
“For the oil market, we’re coming out of a period of economic malaise and should see demand grow with increased economic activity,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $120 billion of assets, said by phone last week. “The Fed taper, and ultimate ending of quantitative easing, takes away fundamental support for the gold market.”
The 120-day correlation between WTI and gold was -0.06 yesterday compared with -0.1 on June 11. The link strengthened to 0.62 in April 2010. The Brent-gold correlation was 0.08 yesterday compared with 0.05 on June 11. The Brent correlation dropped to -0.1 on Feb. 28. A figure of -1 would mean the two move opposite to each other.
Crude and gold gained after Islamic State in Iraq and the Levant captured Mosul, Iraq’s biggest northern city, last week and advanced toward Baghdad, pushing OPEC’s second-largest oil producer to the brink of civil war.
“Gold’s correlation with oil has strengthened of late, driven by growing tensions in Iraq,” analysts including Edel Tully at UBS AG said in a report yesterday. “Looking back over the past year shows that the relationship between gold and oil has generally weakened.”
Investors should “tilt” their energy holdings by 2.5 percentage points to 25.8 percent of their commodity portfolio, Societe Generale SA said in a report published June 4. Gold positions should be cut by 5 percentage points to 17.6 percent, the bank said.
The International Energy Agency raised forecasts for global oil demand in 2014 by 65,000 barrels a day, following stronger-than-expected growth in the first quarter in Japan, the U.S., Germany and the U.K. World fuel consumption will increase by 1.3 million barrels a day, or 1.4 percent, this year to average a record 92.8 million barrels day, the Paris-based adviser to oil-consuming nations said in a monthly report on May 15.
“We are buying crude and selling gold,” Bill Baruch, a senior market strategist at Iitrader.com in Chicago, said by phone on May 27. “Gold is not the most attractive safe-haven asset at the moment. It’s not been able to produce much yield at all. Crude oil has been moving higher with the better economic outlook.”
Holdings in exchange traded funds backed by gold touched 1,714.4 metric tons on June 16, the lowest since October 2009. In 2013, more than $73 billion was erased from the value of the funds, according to data compiled by Bloomberg.
“We continue to recommend selling gold rallies as we believe that gold is in a multiyear downtrend driven by the prospect of U.S. rate hikes,” Societe Generale said, forecasting that the metal, trading above $1,200 this year, may break below that level in 2015 and fall under $1,000 in 2016.
Goldman Sachs Group Inc. predicted that gold will extend 2013’s 28 percent slump in 2014. The drop last year ended a 12-year rally. An accelerating U.S. economy means bullion will fall to $1,050 in 12 months, Goldman forecasted on May 13.
“We have seen some moves in gold but nothing significant to take it higher,” Laura Taylor, senior market strategist at RJO Futures, said in a telephone interview from Chicago yesterday. “Oil, on the other hand, is more tradable and can go in one direction very fast.”